M+M turns $22m profit into $10m loss

Minds + Machines today reported a 2015 loss of $10 million and further outlined its “transformative” restructuring and China strategy.
It’s the second full year of operating results M+M has posted since its first new gTLDs went live, and they’re not encouraging.
Revenue for accounting purposes was $6.3 million, but the cost of sales was $6.2 million, leaving gross profit of just $101,000.
Factoring in $12.1 million of operating expenses, a $7.9 million gain from losing new gTLD auctions, and other expenses, the total loss before tax was $10 million.
That’s compared to the $22 million profit M+M reported for 2014, a number entirely reliant on $33.7 million of auction loss payments.
The company also reported its “billings”, a line item that does not use the accounting method of deferring revenue across the life of a domain and is therefore more in line with incoming cash.
Billings for 2015 were $7.9 million, compared to $5 million in 2014. Gross profit under that measure was $1.7 million, but the $12 million of operating costs still made the company very unprofitable.
Ignoring the auction benefits in 2015, which will not last forever, it’s pretty clear that M+M was a company spending much more operating new gTLDs than it was making from them.
COO/CFO Michael Salazar said in a statement:

However, billings of $7.9 million for the year were simply not of a sufficient scale to cover the associated cost of sales ($6.2 million) and operating expenses ($12.2 million), which combined reached $18.4 million for 2015. Similarly, the $0.6 million savings achieved in the period by the decisions mid-year to stream-line the existing operational set-up were not of a magnitude to have any material impact in the year under review. That said, forfeited cost of sales and operational expenses as a result of the 2015 cost-cutting decisions will amount to $2.7 million in 2016

It’s perhaps little wonder that activist shareholders, apparently not prepared to play the long game, threw out half of the board and key senior executives during the period.
Former PR man Toby Hall took over as CEO in February, replacing co-founder Anthony Van Couvering, and announced earlier this month that M+M is dumping its registrar and back-end registry businesses.
Its registrar customers have been sold to Uniregistry, and it will outsource its registry back-end to Nominet, to save costs.
Salazar said that the two deals will lead to $2 million in savings, but won’t be complete before the fourth quarter. It seems unlikely they’ll have a great impact on 2016 numbers.
Headcount has been reduced from a peak of 61 to 43 at the end of the year, and is expected to drop further to 25. Salazar said this will save it $4.7 million a year.
Even with these cost reductions, M+M will still need to essentially double its revenue in order to hit operating profitability, it seems.
The company is pinning some of its growth hopes on .vip, which it expects to do well in China. It launches May 18.
Hall said in a statement that M+M would not follow the lead of competitors (Famous Four Media springs to mind) by offering first-year registrations for free to build market share. He said:

Based on the enquiries received during Sunrise and feedback gained through our two recent marketing trips to China, it is clear that there is genuine interest in the domain both within and outside of China. As a result, we will not be using a year-one freemium approach to simply inflate year-one registrations. Instead, we intend to be keenly priced to ensure margin to ourselves — and registrations — as well as protect the integrity of the domain. The volume we anticipate to be generated through keen pricing will then support the sales of our premium names in this domain.

The company also plans to invest in its .law sales team, because billings for that gTLD have been behind expectations.
M+M had $34.6 million in the bank and eight outstanding contested new gTLD applications at the end of the year.

Facebook, under Chinese court threat, transfers Instagram.com to its new registrar

It’s not quite cyberflight, but Facebook has transferred threatened domain name instagram.com to its newly acquired in-house registrar.
Whois records show that the domain, used for the popular photo-sharing social network, was moved from MarkMonitor to RegistrarSEC yesterday.
It emerged on Friday that Facebook had recently acquired RegistrarSEC.
So why the transfer?
It does not appear that the move is part of a wholesale transfer of domains — facebook.com, whatsapp.com, fb.com and all the other Facebook domains I checked are still with MarkMonitor.
Instead, I would speculate that it’s related to the lawsuit in China in which the family of a deceased cybersquatter are fighting for the return of the domain to their ownership.
Instagram acquired the name for $100,000 from the Guangdong-based Zhou family in January 2011, just a couple of months after Zhou Weiming, the now deceased patriarch, bought it from an American domainer.
According to a lawsuit (pdf) filed against the family in California by Instagram this January, Zhou’s widow and two daughters are suing the third daughter in a Chinese court for selling the domain without the proper authority.
They want the domain returned to them.
By transferring instagram.com to a registrar completely controlled by Facebook, the company has removed one huge risk factor from the Chinese lawsuit.
If MarkMonitor were to be served with a Chinese court order ordering the transfer of the domain to the Zhous, and it were to comply, the Instagram service used by millions could be held hostage by a group of known cybersquatters.
Now that the domain is at RegistrarSEC, Facebook gets the ability to refuse to comply with any such order.
This all begs the question of whether the deep-pocketed social network would go to the trouble of acquiring a registrar (with only 11 names to its accreditation) purely to provide a layer of insurance.
A fresh ICANN accreditation would be cheaper, but would take longer, and transferring to a different third-party registrar wouldn’t really solve the problem.
Instagram is predicted by one analyst to provide Facebook with $5.8 billion in annual revenue by the end of the decade.

ICANN refuses to play Ted Cruz’s game

ICANN has blown off US senator Ted Cruz by declining to answer a bunch of framed questions about its engagement with China.
In a letter (pdf) to Cruz and fellow senators Michael Lee and James Lankford, ICANN chair Steve Crocker testily explains that ICANN has offices and relationships all over the world, given the nature of its mandate.
There’s a suggestion that ICANN’s board resents the “insinuation” that talking to China means it’s ready to be captured by it or implement its censorship policies.
Crocker wrote:

ICANN does not endorse the views of any particular stakeholder, regardless of the organization’s engagement efforts, the composition of its advisory committees, and where it holds its meetings. In this sense, ICANN’s engagement with China as a global Internet stakeholder does not suggest any level of support for the nation’s government or its policies. Similarly, no endorsement of such matters could reasonably be inferred from the operations of the United States’ largest technology firms operating in China, including Cisco, Dell, HP, IBM, Intel, LinkedIn, Microsoft, Qualcomm and Uber. These firms, like ICANN, do not endorse the policies, laws, and regulations of China simply by operating there. As long as the U.S. Government has a policy of engagement with China, U.S. firms operate there without the insinuation that doing so makes them complicit in China’s censorship.

The letter was written in response to a bullet-pointed list of a few dozen question Cruz has posed in letters over the last couple of months.
The Cruz missives were a fairly obvious fishing expedition, with the senators apparently looking for sticks to beat ICANN with in the form of evidence that the organization is too friendly with the dreaded Chinese.
Some on the right wing of American politics seem to see the transition of ICANN/IANA partially away from US government oversight as a wedge issue they can use to show Obama is happily selling the ‘Murican constitution to China.
But Crocker ducks most of Cruz’s questions, preferring instead to present an alternative narrative.
He does not, for example, give answers to simple factual questions related to former CEO Fadi Chehade’s joining as co-chair of a committee of the China-led World Internet Conference.
Instead, he refers Cruz to a previous letter from Chehade, and notes that Chehade is no longer with ICANN.
He does not answer anything related to XYZ.com’s proposals related to selling .xyz domain names in China, which Cruz reckons could be used to censor the people of Hong Kong.
Neither does he confirm that ICANN pays government-affiliated CNNIC for collocated office space in Beijing, which wasn’t disclosed until it came out at a press conference last month.
I imagine Cruz, in receipt of Crocker’s letter, is feeling much the same as I do when an interviewee waffles in response to simple questions.
Pissed off.
I doubt this exchange is over.

Cruz keeps up pressure on ICANN brass

US presidential wannabe Sen. Ted Cruz has sent ICANN’s chair another nasty letter, demanding to know why he hasn’t yet responded to a laundry list of questions about former CEO Fadi Chehade’s relationship with the Chinese government.
The letter, also signed by fellow Republican senators Mike Lee and James Lankford, expresses “dismay” over the lack of response from Steve Crocker.
Cruz et al have been posing awkward questions to ICANN’s top brass since it emerged in December that Chehade had taken an unpaid position on an internet governance advisory committee run by China.
The senators say they’re worried that the US relinquishing its oversight of the IANA functions will give governments with poor freedom of expression records too much control over the internet.
A more likely explanation is that the IANA transition is an Obama initiative, and if Obama single-handedly saved a bunch of kids from a burning orphanage Cruz & Co would blame him for contributing to over-population.
That’s more or less the sentiment Chehade expressed at ICANN 55 last month, when he said:

And you know that this [Cruz] letter is not driven by anyone really worried about the transition. This is someone really worried about politics. So let’s not bring politics into the transition… Let’s resist bringing the politics of our lovely capital into this process… I think everyone knows this is political, even those in his own party… We will answer all these questions… And we will respond to the questions fully, to the Senators’ full satisfaction.

The new letter calls Chehade out for this statement, saying he “disparaged” what they call an “oversight request”.
An actual Congressional oversight hearing, focusing on the transition, a couple of weeks ago had absolutely no fireworks whatsoever.
It seems that the Republican-led committee actually responsible for internet matters, which does not include Cruz as a member, isn’t particularly upset about the IANA transition.
Nevertheless, the new Cruz letter re-poses a whole list of questions about Chehade’s involvement in China and Crocker and the ICANN board’s response to it.
The questions were originally asked March 3. ICANN had evidently said it would respond by March 18 but has not.
Cruz’s hand in the Republican primaries against front-runner Donald Trump has been strengthened in recent days, increasing the possibility that he could become US president next January.

Over 20 companies fighting for .org contract

More than 20 companies want to take over the back-end registry for the .org gTLD, according to Public Interest Registry.
PIR put the contract, currently held by Afilias, up for bidding with a formal Request For Information in February.
It’s believed to be worth north of $33 million to Afilias per year.
PIR told DI today that it “received more than 20 responses to its RFI for back-end providers from organisations representing 15 countries.”
That represents a substantial chunk of the back-end market, but there are only a handful of registry service providers currently handling zones as big as .org.
.org has about 11 million names under management. Only .com, .net and a few ccTLDs (Germany, China and the UK spring to mind) have zones the same size or larger.
PIR said it would not be making any specific details about the bidders available.
The non-profit says it plans to award the contract by the end of the year.

China floats domain crackdown plans

The Chinese government is planning a crackdown on internet domains that could see mass censorship of non-Chinese names.
Draft rules floated for public comment this week are being widely reported as potentially blocking any domain that is not registered via a registry or registrar with a government license.
There are more than 50 provisions in the draft, but Article 37 is the one causing the most concern.
A translation published by Quartz yesterday has it reading like this:

Domain names engaging in network access within the borders shall have services provided by domestic domain name registration service bodies, and domestic domain name registration management bodies shall carry out operational management.
For domain names engaging in network access within the borders, but which are not managed by domestic domain name registration service bodies, Internet access service providers may not provide network access services.

At its worst, it suggests that every domain name not registered entirely through China-approved registries and registrars could be blocked from resolving in China.
You’d need a domain in .cn or a licensed gTLD, registered through a Chinese registrar, to access Chinese internet users, in other words.
But even Chinese locals who follow the issue closely are reportedly saying the regulations are vaguely worded, so it’s not clear exactly what would be blocked.
If you can read Chinese, the draft rules can be downloaded from this page. I’d be interested in hearing your take on them.
The rules also demand that domain name companies prevent domains carrying words deemed harmful from being registered.
There are additional controls on content — bans on porn, “rumor” and basically anything the Chinese government does not like — and registrant identity validation requirements.
The rules appear to be designed to replace the existing 2004 regulations that among other things force registrars and registries to obtain government licenses before the names they sell are allowed to resolve.
Those rules have led to several Western new gTLD registries, including Rightside, Famous Four Media and Minds + Machines, opening up corporate entities in China, in order to tap into the thriving market.
Local entities are of course subject to local laws — and ICANN contracts oblige them to abide by all applicable laws — which opens up the risk of Chinese regulations leaking out into the wider internet.
That almost happened with XYZ.com, which announced and then retracted (or clarified) an apparent plan to globally block domains deemed unsuitable by the Chinese censors.
It is inevitable that the proposals, which are open for public comment until April 25, will be used by US Congressional Republicans as a stick to beat ICANN and fight the imminent transition of IANA away from US government oversight.
High profile GOP politicians including presidential hopeful Ted Cruz have pointed to Chinese censorship as a risk of removing the USG from DNS root zone management.
But this isn’t really an ICANN problem as such. It’s a market forces problem.
Some new gTLD registries are seeing huge sales volume from Chinese registrants, who are trading many thousands of short, meaningless domains like baseball cards at the moment.
DI data shows that Chinese registrars accounted for 18.4 million gTLD domains in November 2015, up by 8.8 million domains in 12 months.
That number is likely to be several millions greater now, given the speculative activity of the last few months.
For registries, fully exploiting this market requires some sort of local presence, which in turn means exposing themselves to the already pretty bad Chinese censorship regime.
They’re going to have to be careful if they want to avoid China using the market to achieve the kind of back-door policy control it would never be able to obtain via ICANN.

ICANN China “conflict” denied as Cruz looks for dirt

ICANN chair Steve Crocker has denied that outgoing CEO Fadi Chehade has a conflict of interest with the Chinese government, after US Senator Ted Cruz pressed him for more details on Chehade’s extra-curricular activities in the country.
“There’s no money involved, so there’s no conflict of interest involved at all,” Crocker said at a press conference, in response to a DI question, at ICANN 55 in Marrakech today.
I put the question because presidential hopeful Cruz, along with fellow senators James Lankford and Michael Lee, said in a letter last Thursday (pdf) that Chehade has a “confirmed personal conflict of interest” when it comes to the Chinese government.
That appears to be based on his admission, in a letter to Cruz et al last month, that his travel expenses to the World Internet Conference (aka, the Wuzhen Summit), where he’s agreed to be co-chair of an advisory committee after he leaves ICANN, would probably be picked up by the Chinese government.
According to Cruz, Chehade is in the pocket of the Chinese government because he has accepted or will accept flight-plus-hotel expenses to a Chinese conference, which could distract him from his $900,000-a-year ICANN salary.
Cruz’s most recent letter seeks further information about Chehade’s involvement with Wuzhen and the ICANN board’s response when they found out about it.
It appears to be basically an effort to get as much evidence as possible to support the ludicrous Republican claim that the IANA transition process initiated by the Obama administration risks handing control over internet censorship to the Chinese.
This, while some governments are complaining that the community-drafted IANA transition proposals actually weaken the hand of governments.
“There’s much less there than people are making an issue of, so there’s just no problem from our point of view,” Crocker said at the press conference.
“There are several degrees of separation between matters at ICANN and involvement with the Chinese government,” Crocker said. “[Wuzhen is] not controlled by the Chinese government and it’s intended to facilitate bringing in people from all over the world, it’s a matter of inclusion rather than exclusion.”
While Cruz asks quite a lot in his latest letter, one of the questions that leaped out at me claimed that ICANN does not publish the address of its Beijing office on its web site.
All the other local “Engagement Centers” have physical addresses listed, but not the Chinese one, Cruz said.
It turns out he’s correct.
I asked at the press conference why the address was not published on the ICANN web site and whether Cruz was correct to infer that ICANN is based in the same office as CNNIC, the government-controlled .cn ccTLD registry.
Chehade replied: “As I’m sure you’ve read in our press releases when we opened that office, that office was opened with a very clear press release by us and one by CNNIC indicating that our office would be collocated with CNNIC. So there’s nothing new here.”
He thanked Cruz for pointing out the omission on the ICANN web site and said it would be corrected.
He said that it’s ICANN’s habit to collocate engagement centers with local players, and that Beijing was nothing different. ICANN pays CNNIC for the collocation, he said.
Looking at the ICANN press release (pdf) announcing the Beijing office opening, back in 2013, it seems Chehade was incorrect, however. The press release makes no mention of CNNIC hosting the new ICANN engagement center. It does not mention CNNIC at all.
CNNIC did at the time state in its own press release, in a roundabout way, that ICANN Beijing would be sharing its office.
I also asked whether the outcome of the US presidential election would have a direct bearing on whether ICANN is able to execute the IANA transition. Would the transition happen if Cruz gets elected president of the USA in November?
Crocker gamely waffled for a couple of minutes but didn’t confirm what many take as a given: that Obama initiatives such as the IANA transition are likely to be at risk of a scuppering should a Republican, particularly Cruz, enters the White House.
“As an American I have to say this is one of the most interesting and unpredictable presidential election processes we’ve ever seen,” Crocker said, “but as chairman of the board of ICANN I hope it has no relationship at all to a process that was started in principle when ICANN was initiated in 1998.”

Governments split on IANA transition

ICANN’s Governmental Advisory Committee is unlikely to provide its full backing to accountability proposals supporting the IANA transition.
In meetings at ICANN 55 in Marrkech over the weekend, a handful of GAC delegates publicly stated that they would block consensus over concerns the proposals reduce government power in ICANN.
The most vocal opposition came from Brazil, but it was backed up by the countries including Peru and Russia.
The proposals currently up for debate would make it harder for the ICANN board to disagree with consensus GAC advice, but it clarifies that non-consensus advice does not carry the same weight.
Currently, the ICANN board can reject GAC advice by a simple majority vote, but doing so kick-starts a bilateral negotiation process where the board and GAC have to try to resolve their differences.
The new accountability proposals would raise the threshold to 60% of the board, and the negotiations would only have to take place if the advice carried the full consensus of the GAC.
Under the GAC’s current operating rules, consensus means no one government formally objected to the advice. The accountability proposals would enshrine that definition in the ICANN bylaws.
The proposal was drafted like this to handle what is known as “Stress Test 18” — a scenario in which the GAC switched its decision-making mechanism to a simple majority vote, enabling it to more easily issue potentially more extreme advice.
Brazil finds the whole idea of Stress Test 18 “insulting”. Its delegate told the GAC yesterday:

We consider Stress Test 18 unacceptable. We have said this from the beginning. We think this contaminates the full proposal. I think there are many positive aspects in the proposal coming forward that we could accept, that we could support… I think this compounds a very ugly picture in which it is very clear that the real intent was to circumvent the possibility of governments having meaningful participation unless there is full consensus among its members.

Brazil was one of nine governments to put its name to a letter (pdf) last month criticizing the post-transition accountability proposals.
The letter points out that the current definition of GAC consensus would allow a single government to block consensus, even in the face of overwhelming support from other governments, simply by formally objecting.
This could lead to GAC “paralysis”, the letter stated.
Indeed, we saw something like this a couple of years ago when the US blocked GAC advice against the .amazon gTLD, before eventually withdrawing its objection.
Once it became clear yesterday that the GAC might not be able to provide full consensus on the accountability proposals, some GAC delegates worried aloud about what kind of message that would send to the rest of the world.
The proposals are inextricably linked to the IANA transition, which would see ICANN management of the DNS root zone become independent from US government oversight for the first time.
Some on the hard right of US politics, such as presidential hopeful Ted Cruz, are convinced that the transition will allow China to start censoring the internet.

Cruz says Chehade is in China’s pocket

Terrifying US presidential candidate Ted Cruz has told outgoing ICANN CEO Fadi Chehade to recuse himself from crucial decisions, claiming Chehade is conflicted.
Republican Cruz yesterday said that Chehade can’t be trusted to make decisions related to the IANA transition because he’s already signed up to a Chinese internet governance committee.
Chehade said in December that he’s become co-chair of an advisory committee of the World Internet Conference.
Also known as the Wuzhen Summit, it’s a China-led talking shop that has been criticized for pushing China’s agenda of limiting free speech and promoting governmental control over the internet.
Cruz quizzed Chehade about his involvement in a letter earlier this month, basically fishing for evidence that Chehade was in some way conflicted.
In response (pdf), Chehade said he wasn’t being paid for the committee role, but that his travel expenses would probably be picked up.
Aha! Cruz seized on that admission, writing yesterday:

Travel compensation from the Chinese government can be a form of personal conflict of interest, which could impair Chehade’s ability to act impartially and in the best interest of the [US] government when performing under the [IANA] contract. As such, Chehade should recuse himself from all ICANN decisions that could impact the Chinese government, which include all negotiations and discussions pertaining to the Internet Assigned Numbers Authority (IANA) transition.

Chehade, who says he only joined the committee in order to promote the notion of multi-stakeholder internet governance, makes $900,000 a year at ICANN in salary and bonuses.
With pay so criminally low, it’s easy to see how he could be tempted to subvert his principles for any foreign government who offered him a free business-class flight and a few nights in a swanky Beijing hotel.
He has kids to feed and clothe, after all.
Cruz, on the other hand, has raised a mere $54 million in campaign contributions over the last five years, and not a single dollar of that will influence his political positions in any way whatsoever.

Rightside moves into China too

Rightside has become the latest gTLD registry to open up in China.
The company said today it has created a Wholly Foreign-Owned Enterprise, basically a local subsidiary, in the country.
This is the same beachhead in China taken by Minds + Machines and Famous Four Media recently.
Draconian Chinese government regulations on domain registries and registrars require formal accreditation before domain names can be used by Chinese citizens.
Opening up a local office or working with a local proxy appear to be requirements to obtain this accreditation.
Rightside points out that 45% of new gTLD domain names — 5.4 million — are registered in China. Its own portfolio has seen 90,000 of these.